What Is Gap Insurance?

If you’re in the market to purchase a new vehicle you may feel inclined to gloss over gap insurance, thinking it’s just another expense on an already costly purchase. It also might not seem as straightforward as other kinds of coverages, such as comprehensive and collision. If you’re buying a new vehicle, it’s a good idea to learn about the perks of gap insurance beforehand to decide whether or not it’s right for you. We’ve got the answers to your gap insurance questions here!

 

So, What Is Gap Insurance?

 

Gap insurance is an optional insurance coverage offered by a dealership or financial institution to individuals who are purchasing a new vehicle. In the event your vehicle is totaled or stolen, gap insurance provides coverage to bridge the “gap” between the actual cash value of your vehicle and the remaining balance of your lease or loan.

 

How Is Gap Insurance Useful?

 

Let’s say you purchase a new vehicle for $20,000. If that vehicle depreciated in value 20 percent, its cash value would be $16,000. If your vehicle was totaled and you still owed $18,000, you would have to pay the $2,000 difference out of pocket. That’s where gap insurance would come in: if you have gap insurance, the $2,000 difference between your auto loan’s balance and your vehicle’s cash value would be covered.

 

Another thing to consider is the current market value for vehicles. If you purchase a vehicle at a time when market values are high, you may find yourself in a position where you wished you had purchased gap insurance if the market value drops and you get in an accident. The gap between what you paid when you purchased your vehicle and what it is worth in the future could be significant.

 

Is Gap Insurance Necessary for Me?

 

So, should you get gap insurance? The Insurance Information Institute advises that you should consider buying gap insurance if you:

 

•           Made a down payment of less than 20 percent

•           Are financing for 60 months or more

•           Are leasing a vehicle

•           Purchase a vehicle that depreciates quickly

 

The bottom line is, if you are worried the actual cash value of your vehicle could be less than what you owe on your loan, and you want to avoid a situation in which you may have to pay the difference out of pocket, you can give yourself the peace of mind by purchasing gap insurance. 

 

Do you need a refresher on the different kinds of insurance coverages and which ones you need to have? Check out our blog on insurance coverages for beginners!